The end of the Cold War has called into question the activities of
the national laboratories and, more generally, the level of support now
given to federal intramural research in the United States. This paper
seeks to analyze the potential role of the laboratories, with
particular attention to the possibility, on the one hand, of
integrating private technology development into the laboratory’s menu
of activities and, on the other hand, of outsourcing traditional
mission activities. We review the economic efficiency arguments for
intramural research and the political conditions that are likely to
constrain the activities of the laboratories, and analyze the early
history of programs intended to promote new technology via cooperative
agreements between the laboratories and private industry. Our analysis
suggests that the laboratories are likely to shrink considerably in
size, and that the federal government faces a significant problem in
deciding how to organize a downsizing of the federal research
establishment.

The federal government directly supports nearly half of the
research and development (R&D) performed in the United States. Of this,
about a third is for intramural research (research performed by
agencies or in federal laboratories), while the remainder is performed
extramurally by industry, universities, and nonprofit organizations
under grants or contracts with the federal government. In fiscal year
1994, federal obligations for all laboratories amounted to nearly 23
billion dollars. In constant dollars, the federal R&D budget has been
shrinking since fiscal year 1989, and the laboratory budget has
followed suit (see Fig. 1).‡

Intramural research includes a range of activities. Much of it is in
support of agency activities and contributes to technology that is
purchased by the government. Examples include weapons technology in
Department of Defense laboratories and research that supports the
regulatory activities of the Environmental Protection Agency and the
Nuclear Regulatory Commission. (The distribution of intramural and
extramural research by agency is shown in Table
1.) A relatively small but important activity is
the collection and analysis of statistics by the Department of
Commerce, the Bureau of Labor Statistics, and the National Science
Foundation. A significant share of the intramural R&D budget goes for
basic and applied science in areas where the government has determined
that there is a public interest: National Institutes of Health (NIH) in
the biomedical field; National Institute of Standards and Technology in
metrology; Department of Energy (DOE) in the basic physics; and
agricultural research at the Agricultural Research Stations. Finally,
the laboratories support commercial activities of firms. The final
category has been growing in recent years and is usually distinguished
from all the previous categories (although the distinction is blurred
in some agencies) in that the former are called “mission”
research and the latter “technology transfer” or “cooperative
research with industry.”

Federal obligations for total R&D, selected agencies and
performers, fiscal year 1994

An important distinction between the categories lies in the treatment
of intellectual property rights. Whereas the government has pursued
strategies to diffuse the results of mission activities, the
cooperative programs contain arrangements that allocate property rights
to private participants. This distinction is not sharp: results of
defense-related work, of course, have been tightly controlled. However,
the government retains for itself property rights for intramural
defense R&D, and where feasible, licenses the patents to more than one
company. Alternatively, the new programs have used assignment of
property rights as a tool to raise profits to firms and thereby
encourage private technology adoption, through exclusive licensing
arrangements (particularly for those technologies developed primarily
by the laboratories) or assignment of patents (for cooperative
projects). In their intellectual property rights policy, the latter set
of programs mirror the policies employed for extramural research. Thus
to some extent, private firms effectively retain residual rights in
inventions. For these programs, the laboratories can be characterized
in part as subcontractors to industry.

Recently, the role of the federal laboratories in the national research
effort has come under serious reexamination. At the core of the
question about the future of the national laboratories is the
importance of national security missions in justifying their budgets.
The end of the Cold War has called into question the missions of the
Department of Defense laboratories and the weapons laboratories run by
the DOE and its contractors. In addition, the end of the Cold War has
weakened the political coalition that supports public R&D activities in
the United States more generally. Furthermore, increased expenditures
on entitlement programs for the elderly and resistance to further tax
increases has placed further pressure on budget levels at the
laboratories. The budgets of most federal laboratories have been
constant or declining in recent years, and expectations are that
reductions will continue.

In contrast to these trends, in the early 1980s the federal
laboratories were called on to expand their activities. Responding to
the perceived productivity slow-down in the 1970s, and later, the
increased competition of foreign firms in high-tech industries, efforts
were undertaken by the laboratories to improve the technology employed
by U.S. firms. The Stevenson–Wydler Act of 1980 established
“technology transfer” as a role of all federal laboratories.
Whereas the original Stevenson–Wydler Act had few teeth, it ushered in
a decade of legislative activity designed to expand laboratory
activities in promoting private technology development. The primary
innovation in laboratory activities has been the development of
cooperative research and development agreements, or CRADAs, which
provide a mechanism for industry to enter into cooperative, cost-shared
research with government laboratories. In 1993, the Clinton
Administration proposed that these activities would not only be
pursued, but would substitute for the decline in traditional activities
at the national laboratories (4, 5). President Clinton proposed
devoting 10–20% of the federal laboratory budgets to these programs.
That number has not been reached, although CRADA activity has been
impressive. The President’s 1996 Budget claims that 6093 CRADA
partnerships had been entered into by fiscal year 1995, with a value
(including cash and noncash contributions of public and private
entities) of over $5 billion (6). Some estimates of the size and
distribution of CRADAs are provided in Table 2.

The past 2 years have witnessed a retreat from the policy of promoting
commercial technology development at the laboratories. During 1995, the
Clinton Administration undertook a major review of the national
laboratory structure in the United States (8). Both its reports (9–13)
and additional analyses from the science policy community (14–16) have
recommended that the laboratories deemphasize industry technology
efforts, outsource some R&D activities, and concentrate on missions,
narrowly defined. Although the cooperative programs continued to
expand, their future is now problematic.

This paper seeks to analyze the potential role of the laboratories,
with particular attention to the possibility, on the one hand, of
integrating private technology development into the laboratory’s menu
of activities and, on the other hand, of outsourcing traditional
mission activities. The next section reviews the economic efficiency
arguments for intramural research and the political conditions that are
likely to constrain the activities of the laboratories. The third
section considers cooperative agreements between the laboratories and
industry in somewhat more detail, and reviews some of the early history
with these programs. Our discussion suggests that the laboratories are
likely to shrink considerably in size, and that the federal government
faces a significant problem in deciding how to organize a downsizing of
the federal research establishment. In the last section, we examine
this issue, and conclude that without some advance planning about how
to downsize, the process is likely to be costly and inefficient. In
particular, downsizing cannot be addressed sensibly without two prior
actions: a reprioritization of the relative effort devoted to different
fields of R&D, and a commitment to minimize the extent to which
short-term political considerations affect the allocation of cuts
across programs and laboratories. Thus, to rationalize this process, we
propose the creation of a National Laboratories Assessment and
Restructuring Commission, fashioned after the Military Base Closing
Commission.

Economics, Politics, and Intramural Research

The economic rationale for government support of R&D has two
distinct components. The first relates to the fact that the product of
R&D activity is information, which is a form of public good. The second
relates to problems arising in industries in which the federal
government has market power in its procurement.

The public good aspect of R&D underpins the empirical finding that,
left to its own devices, the private sector will underinvest in at
least some kinds of R&D. To the extent that the new information
produced by an R&D project leaks out to and is put to use by
organizations other than the performer of the project, R&D creates a
positive externality: some of the benefits accrue to those who do not
pay for it. To the extent that the R&D performer can protect the new
information against such uses unless the user pays for it, the realized
social benefits of R&D are less than is feasible. (See ref. 17 for an
excellent discussion of these issues.)

Keeping R&D proprietary has two potential inefficiencies. First, once
the information has been produced, charging for its use by others is
inefficient because the charge precludes some beneficial uses. Second,
an organization that stumbles upon new information that is useful in
another organization with a completely different purpose may not
recognize the full array of its possible applications. Hence, even if
it could charge for its use, neither the prospective buyer nor the
potential seller may possess sufficient knowledge to know that a
mutually beneficial transaction is possible.

The potential spillovers of R&D usually are not free; typically, one
firm must do additional work to apply knowledge discovered elsewhere
for its own activities. Hence spillovers generate complementarities
across categories of R&D. More R&D in one area, when it becomes
available to those working in another area, increases the productivity
of the latter’s research. This complementarity can be both horizontal
(from one industry, technology, or discipline to another) or vertical
(between basic and applied areas) (19).

The public goods argument leads to a richer conclusion than simply that
government should support R&D. In particular, it says that government
should support R&D when a project is likely to have especially large
spillover benefits, and that when government does support R&D, the
results should be disseminated as widely as possible. One area where
this is likely to be true is in basic research: projects that are
designed to produce new information about physical reality that, once
discovered, is likely to be difficult to keep secret and/or that is
likely to have many applications in a variety of industries. Here the
term “basic” diverges from the way that term is used among
researchers in that it refers primarily to the output of a project,
rather than its motivation. A project that is very focused and applied
may come upon and solve new questions about the fundamental scientific
and engineering principles that underpin an entire industry and so have
many potential uses and refinements.

The public goods argument also applies to industries in which R&D is
not profitable simply because it is difficult to keep new discoveries
secret. If products are easily reverse engineered, intellectual
property rights are not very secure, and innovators are unable to
secure a “first-in” advantage, private industry is likely to
underinvest in R&D, so that the government potentially can improve
economic welfare by supporting applied research and development.

Finally, the complementarities among categories of R&D indicate still
another feature of an economically optimal program: increases in
support in one area may make support for another area more attractive.
Thus, if for exogenous reasons a particular area of technical knowledge
is perceived to become more valuable, putting more funds into it may
cause other areas to become more attractive, and so increase overall
R&D effort by more than the increase in the area of heightened
interest.

If the purpose of government R&D is to add to total R&D effort in areas
where private incentives for R&D are weak and where extensive
dissemination is valuable, a government laboratory is a potentially
attractive means for undertaking the work. A private contractor will
not have an incentive to disseminate information widely and will have
an incentive to try to redirect R&D effort in favor of projects that
are likely to give the firm an advantage over competitors. For basic
research, another attractive institution in the United States is the
research universities, which garner the lion’s share of the extramural
basic research budget.

The second rationale for publicly supported R&D arises when the
government is the principal consumer of a product. The problem that
arises here is that once a new product has been created, the
government, acting as a monopolist, can force the producer to set the
price for the product too low for the producer to recover its R&D
investment. If a private producer fears that the government will behave
in this way, the producer will underinvest in R&D.

Whereas this problem can arise in any circumstance in which a market is
monopsonized, the problem is especially severe when the monopsonist is
the government. The root of the problem is the greater susceptibility
of government procurement to inefficient and even corrupt practices,
and, consequently, the more elaborate safeguards that government puts
in place to protect against corruption. The objectives of government
procurement are more complex and less well defined than is the case in
the private sector, where profit maximization is the overriding
objective. In government, end products do not face a market test.
Hence, in evaluating whether a particular product (including its
technical characteristics) is efficiently produced and worth the cost,
one does not have the benefit of established market prices. In
addition, the relevant test for procurement is political success, which
involves more than producing a good product at reasonable cost. Such
factors as the identity of the contractor and geographic location of
production also enter into the assessment.

Because of the complexity and vagueness of objectives, procurement is
susceptible to inattentiveness or even self-serving manipulation by
whomever in the government—an agency official or a congressional
overseer—has authority for negotiating a contract. To protect against
inefficiency and corruption, the government has adopted extremely
complex procurement rules, basing product procurement on audited
production costs when competitive bidding is not feasible. In such a
system, recovering the costs associated with financial risk and
exploratory R&D in the procurement price is uncertain at best. Thus,
the firm that produces for the government faces another form of a
public goods problem in undertaking R&D: even if the knowledge can be
kept within the firm, the firm still may not benefit from it because of
the government’s procurement rules. Hence, the government usually
deals with the problem of inducing adequate R&D in markets where it is
a monopsonist by undertaking the R&D in a separate, subsidized project.

Unfortunately, the procurement problem is even more severe for research
projects. Because of the problems associated with contracting for
research, in the private sector firms perform almost all of their
research in house. Only about 2% of industrial R&D is procured from
another organization. Monitoring whether a contractor is actually
undertaking best efforts—or even doing the most appropriate
research—is more difficult than monitoring whether a final product
satisfies procurement specifications. Likewise, a firm is likely to
find it easier to prevent diffusion of new information to its
competitors if it does its own work, rather than contracts for it from
someone else. For the government, the analogous problem is to prevent
other countries from gaining access to military secrets or even
commercially valuable knowledge that the government wants U.S. firms to
use to gain a competitive advantage internationally. Thus, it is not
surprising that the public sector has national laboratories: research
organizations that are dedicated to the mission of the supporting
agency, even if organizationally separated, over which the agency can
exercise strong managerial control. Indeed, a primary rationale in the
initial organization of the national laboratories that were established
during the second world war and shortly thereafter was to avoid the
complexities of contractual relationships that would be necessary were
the activities to be performed by the private
sector.§

Table 3 shows the distribution by character of
R&D supported by industry, by government through intramural programs,
and by government through extramural programs. The distribution bears a
rough relationship to the principles discussed here. Government support
for basic research greatly exceeds that of industry, with the
differential magnified when the activities of the Department of Defense
(which invests heavily in weapons development activities) is excluded.
Outside of the Department of Defense, the basic research component of
extramural research is significantly higher than for intramural
research, although the differential narrows in recent years. Thus, the
budget levels are consistent with extramural support for activities
undersupported by the private sector (i.e., basic research) and
intramural support that includes mission-oriented development work as
well as basic research.

Basic research share of federal R&D expenditures by
performing sector and function

The preceding economic rationales for government R&D and national
laboratories do not necessarily correspond to an effective political
rationale for a program. Public policies emerge because there is a
political demand for them among constituents. Organizations that
undertake research have an interest in obtaining federal subsidies
regardless of the strength of the economic rationale behind them. And,
national laboratories, once created, can become a political force for
their continuation, especially large laboratories that become
politically significant within a congressional district.

In most cases, areas of R&D are not of widespread political concern.
Instead, the advocates consist of some people who seek to attain the
objectives of the R&D project and some others who will undertake the
work. In principle, an area of R&D could enjoy widespread political
support, but as a practical matter almost all R&D projects have
relatively narrow constituencies. Even in defense, which until the
demise of the former Soviet Union enjoyed broad-based political
support, controversies emerged out of disagreements about the
priorities to be assigned to different types of weapons systems:
nuclear versus conventional weapons, aircraft versus missiles versus
naval ships, etc.

The standard conceptual model of understanding the evolution of public
policy involves the formation of support coalitions, each member of
which agrees to support all of the projects favored by the coalition,
not just the ones personally favored. Applied to R&D, the coalition
model implies that public support for a broad menu of R&D programs
arose as something of a logroll among groups of constituents and their
representatives, with each group supporting some programs that it
regarded as having lower value in return for the security of having
stable support for its own pet projects. The members of this support
coalition included various interested in defense-related activities,
but was not confined to them.

The coalitional basis of political support suggests another form of
complementarity among programs. If, for exogenous reasons, the
proponents of research in one area perceive an increase in the value of
their pet programs, they will be willing to support an increase in
other R&D programs to obtain more funds for their own. Hence,
coalitional politics can be expected to cause the budgets for different
kinds of research to go up and down together, even across areas that do
not have technical complementarities.

In other work, we have tested the hypothesis that real federal R&D
expenditures by broad categories are complements, and are complementary
with defense procurement. In this work, we use two-stage least squares
to estimate simultaneously annual expenditures on defense R&D, civilian
R&D, and defense procurement for the period 1962–1994.

One major finding is that defense and civilian R&D are strong
complements, that defense procurement and defense R&D are complements,
and that defense procurement and civilian R&D are substitutes.
Quantitatively, however, the last effect is sufficiently small so that
an exogenous shock that increases procurement has a net positive effect
on civilian R&D as well as defense R&D. Logically, the system works as
follows: if defense procurement becomes more attractive, it causes a
small reduction in civilian R&D and a large increase in defense R&D;
however, due to the combination of political and economic
complementarities between defense R&D and civilian R&D, the increase in
defense R&D leads to an increase in civilian R&D that more than offsets
the initial reduction.

The other major finding is that basic and applied research are also
strongly complementary, with analogous relationships with procurement.
Whereas defense procurement and basic research are substitutes,
quantitatively this relationship is smaller than the complementarities
between procurement and applied research and between applied research
and basic. Hence, an exogenous shock that increases procurement has a
net positive effect on both basic and applied R&D.

These results have important implications for the national
laboratories. Many have observed the obvious fact that the reductions
in defense expenditures associated with the end of the Cold War have
led to reductions in defense-related R&D, including support for
defense-related national laboratories. About the time that the end of
the Cold War was in sight, federal officials and the national
laboratories placed new emphasis on commercially relevant R&D. At the
national laboratories, this emphasis took the form of participation by
the laboratories in large industrial research consortia (such as
SEMATECH, a consortium concerned with semiconductor manufacturing
technology) and in CRADAs with individual firms to apply in-house
expertise to commercial R&D problems. Simultaneously, the Department of
Defense developed its “dual use” concept: supporting the
development of new technology that could be used simultaneously for
military and civilian purposes. The theme running through these
programs was that a new emphasis on commercially relevant activity
could substitute for the drop in demand for national security brought
on by the end of the Cold War.

In principle, this strategy could have worked—but only if a genuine
exogenous shock took place that increased politically effective demand
for nondefense R&D. If a counterpart to the Soviet Union in defense
after World War II arose in commercial activities around the middle of
the 1980s, the complementarities among categories of research could
have worked not only to maintain the overall R&D effort, but, through
complementarities between defense and civilian R&D, actually softened
the blow to defense R&D. For a while, through the economic stagnation
of the late 1970s and early 1980s, the declining relative economic
position of the United States in comparison to Japan and the European
Economic Community (EEC) was a possible candidate; however, as the
decade of the 1980s progressed, and the economic performance of other
advanced industrialized nations deteriorated relative to the United
States, it became clear that no such exogenous change was taking place.
Regardless of the conceptual merits of civilian R&D, whether basic or
applied, no fundamental change had taken place in the political
attractiveness of such work.

If this line of reasoning is correct, there is no “peace
dividend” for civilian R&D, whether basic or applied. To the extent
that there are technical complementarities between defense and civilian
R&D, the reduction in the former reduces the attractiveness of the
latter, all else equal. And, because one member of the R&D
coalition—the defense establishment—has experienced an exogenous
shock that reduces demand for national security, the willingness of
this group to support other areas of R&D has concomitantly shrunk.

The preceding argument abstracts from partisanship and ideology in
politics. The November 1994 elections increased the relative power of
defense-oriented interests compared with those who support civilian
R&D. To the extent that the relative influence of these groups has
shifted, a given level of economic attractiveness of defense and
civilian R&D will produce more of the former and less of the latter.
But the forces we identify here are separate from these short-term
political shifts. Here a reference to the mid-1970s and early 1980s is
instructive.

In the mid-1970s, in the wake of Viet Nam and Watergate, the Congress
became substantially more liberal. Not only did defense expenditures
fall, but so did almost all components of R&D, civilian and defense,
basic and applied. In the late 1970s, under President Carter and with a
liberal Democratic Congress, defense procurement and all categories of
R&D began to recover. The election of 1980 brought Republic control of
the Senate and the Presidency, and a more defense-oriented government;
however, after much criticism of federally subsidized commercial R&D,
again all categories of R&D expanded until the end of the Cold War.
Now, once again, all categories are declining. Expenditures in the
national laboratories followed the same pattern.

Cooperative Research Activities at the Federal Laboratories

The purpose of this section is to examine in more detail the set
of cooperative research activities that the federal laboratories have
been engaged in during the recent past. CRADAs seek to advance
technology that will be used by private industry, and in particular
industries that compete with foreign firms. Expanding such activities
is the primary proposal for maintaining historic levels of support at
the federal laboratories.

The economic justification for the programs is not frivolous. In part,
the case rests on the considerable expertise of the federal laboratory
establishment. The contributions of the laboratories to commercial
technology has, in the past, been substantial, and provides a basis for
the belief that considerable technology exists at the laboratories
whose “transfer” to industry would be beneficial. Detailed
studies of the R&D process suggest that transferring technology is far
from a straightforward process, and can be substantially facilitated by
close interaction, ideally through joint activities of personnel from
the transferring and receiving entities. Thus, cooperative projects are
seen as a mechanism to increase the extant and efficiency of technology
transfer.

Second, the laboratories and private firms can bring different areas of
expertise to the research project, so that complementarities may exist
between the two types of entities. As a result, cooperative R&D may
yield interesting new technologies that go beyond transfers from the
laboratories to industry. Both arguments apply to private firms, in
addition to firms and the laboratories, and provide economic
justification for the government’s preference for working with private
consortia, and with consortia that include university members as well
as commercial firms.

Instituting the policy has required legislation that departs
significantly from some past practices. One set of laws has dealt with
the conflict between promoting joint research and antitrust policies.
Relaxed antitrust enforcement was established for research joint
ventures in 1984, and extended in 1993 to joint production undertaken
by firms to commercialize the products of joint
research.¶

The thornier legislative problem involves intellectual property rights.
Historically, results of publicly supported research (both intramural
and research supported by grants and contracts) were not patented. The
policy was consistent with the philosophy that the results were public
goods, and hence social benefits would be maximized by wide
dissemination, constrained only by the requirements of national
security. However, this philosophy was manifestly at odds with the new
programs. Implementing new technology typically requires large
investments that constitute sunk costs of development. As with other
R&D expenditures, firms may not, absent some form of patent protection,
be able to recover these expenditures if the products are sold in
competitive markets. Moreover, if the purpose of the programs is to
advantage U.S. manufacturers over foreign competitors, widely
disseminating the laboratories’ research results is (in the short-run)
counterproductive: the government needs to erect barriers that prevent
the diffusion of technology to foreign firms. Thus, the policies have
required the government to rethink its policies on intellectual
property rights.

Congress has reconsidered intellectual property rights policies in
nearly every legislative session for the past 15 years. Currently firms
and universities are, with numerous caveats, allowed to patent
inventions arising from federal contract work and to obtain exclusive
licenses for application of inventions to specific fields of use for
inventions arising from cooperative work with the federal laboratories.
Government-owned, government-operated laboratories (GOGOs, or the
intramural category of activities) obtained this authority in 1986;
government-owned, contractor-operated laboratories (GOCOs, including
the federally funded research and development corporations) were given
the authority in 1989.‖ Chief caveats
include (i) small business preferences in the assignment of
exclusive licenses; (ii) requirements (with exceptions) for
domestic manufacturing; and (iii) limited government
march-in rights.** Disposition of intellectual
property rights have become increasingly complicated with the
laboratories’ increased emphasis on cooperative research, as opposed
to technology transfer, and with their preference for working with
consortia, wherein arrangements are needed to allocate, specify and
protect the rights of each participant.

The initial legislation for these policies enjoyed broad non-partisan
support; indeed, Congress passed the major bills by voice vote rather
than conducting rollcalls. More recent efforts to modify and clarify
patent policies have not been successful. Similarly, CRADAs have
enjoyed wide support from both industry and politicians. Until last
year, agency heads were regularly exhorted in hearings before Congress
to speed up and expand their cooperative activities. The number of
CRADAs executed by agencies has grown enormously overall (see Table 2
for recent statistics), and agencies have received far more requests
from private firms for cooperative research than they are able to
accommodate. However, enthusiasm for the policies appears to be waning.
Reports from the Office of Technology Assessment and DOE Advisory
Committees have recommended that DOE focus more narrowly on agency
missions; the current Congress is likely to slash budgets for the
extramural programs in fiscal 1996. In part, the turnaround reflects
the partisan shift in Congress. But more importantly, both it and the
difficulty congress has had in resolving intellectual property rights
issues reflects more fundamental political and economic problems with
the policies.

The potential problems in these programs are illustrated by the history
of CRADAs at NIH. Table 2 reveals a rather puzzling statistic. NIH is
the primary provider of biomedical research in the United States.
Moreover, the biomedical industry is extraordinarily research intensive
and opportunities for new products and processes are rife. Yet NIH is
now involved in a very modest number of CRADAs. This was not always the
case (see Table 4). However, CRADAs at NIH have
suffered from previous technological successes. In the past, some
projects created especially valuable property rights, which were
conferred on private partners. As a result, some firms enjoyed
apparently exorbitant profits, and direct competitors were excluded
from what could be presented as a government-sponsored windfall—two
conditions that created political firestorms.

The first firestorm arose in 1989 over 3′-azido-3′-doexythymidine
(AZT), a drug for treating patients infected by HIV, which was
developed in a CRADA with Burroughs Wellcome
Company.‡‡ Members of Congress
were outraged at the price set by Burroughs Wellcome for the drug; in
response, NIH adopted a “fair pricing” clause for future CRADAs.
The clause did not resolve the controversy, for to institute it, NIH
would have to undertake a broad examination of the economics of the
pharmaceutical industry—in effect, an effort tantamount to that
required for traditional economic regulation. Then-Director of NIH
Bernadine Healy appointed a panel to study the issue, but ultimately
concluded that NIH was unable to undertake the type of economic
regulation of pharmaceutical prices that would be necessary to enforce
it. Furthermore, NIH lacks any statutory basis for obtaining the
necessary information. An additional problem was identified in 1994 by
a New York patent attorney who served on the NIH panel, and claimed
that the U.S. Department of Justice had decided not to enforce drug
patents issued to firms participating in CRADAs. Industry officials
claim that the political problems and legal uncertainties about the
ultimate disposition of property rights have made them reluctant to
engage in CRADAs with NIH. The statistics bear out their claim.

The high profits of drug companies for particular products developed
under CRADAs may have engendered a particularly fast response from
Congress since it is also the public sector that pays a large share of
the costs of medical care. But the apparent inequity—public support
for companies who are then in a position to extract large profits from
consumers—could easily arise in other cooperative research activities.
As yet, complaints of either upstream suppliers or downstream customers
have not focused on the products of CRADA consortia, but if the
projects are successful, the modifications in antitrust policies as
well as patent policies are likely to cause controversy.

A second issue that has arisen in successful CRADAs concerns the
arrangements for exclusive licensing. Agencies in theory can sign
numerous CRADAs, or sign CRADAs with consortia with open membership
policies, so that CRADA proponents claim that the policy is free from
the possibility that government will create identified “losers”
and “winners” among firms. In practice, exclusive licensing
excludes firms in competitive industries—sometimes at the choice of
the excluded firm, who may not have wished to participate in a
consortium, sometimes because firms will agree to CRADAs only if
competitors do not participate. Successful projects, or projects that
are believed to be likely to succeed, can engender complaints with
political, if not legal clout. NIH ran into this problem with Taxol,
which it developed with Bristol-Myers (a big multinational) and not
with Unimed (a small, inexperienced company). Relying on the small
business preferences written into the Bayh–Dole Act, Unimed succeeded
in opening up more embarrassing oversight hearings for NIH. The
Environmental Protection Agency was sued for executing CRADAs with the
competitors of a firm, Chem Services, who had not been also awarded a
CRADA. The Environmental Protection Agency prevailed in court, but the
politics of “unfair advantage” claims suggests that the agency
take care in future agreements. A third example is a $70 million CRADA
entered into in 1993 between Cray Research and two national
laboratories for supercomputer development. After objections from other
supercomputer manufacturers, and pressure from congress, the CRADA was
dropped.

The issue revealed by these examples is that CRADAs generate political
problems when they create industry winners and losers—or potential
losers—and when they succeed and make visibly large profits for
private firms. The programs have not been in place long enough to
observe how congress will respond if agencies fund—at substantial
cost—projects that do not succeed. Given the nature of R&D, potential
candidates are likely to arise. The historical record of responses in
government procurement suggests that the likely response will be for
the government to institute much more elaborate cost accounting and
oversight, the traditional baggage of procurement policies that CRADA
legislation sought to avoid. Expanded oversight will create conflicts
with the confidentiality provisions of CRADAs and the flexibility of
laboratories in contracting with firms (a hard-won right), and bodes
poorly for private interest in cooperative research.

The fundamental problem with CRADA policy is that the laboratories are
expected to fill an institutional role that provides external R&D to
firms, which, as detailed in the previous section, presents
exceptionally difficult organization and incentive problems,
exacerbated by the essentially political problems presented by the
potential creation of private winners and losers. As a result, we do
not expect that it can provide a long-term rationale for maintaining
the level of support at the federal laboratories.

Implications for the Future

Our examination of the state of the national laboratories yields
two main conclusions. First, that commercial R&D is unlikely to work as
a substitute for national security as a means for keeping the national
laboratories at something like their current level of operation.
Second, in any event the scope for economically and politically
successful collaborations with industry is limited because of the
conflicts of interest between the government and the private sector in
selecting and managing projects. The good news is that uneconomic
commercial collaborations are not likely to command a large share of
the budget, but the bad news is that, because of the political
complementarities among categories of research, the failure of the
commercialization initiative is likely to cause parallel reductions
elsewhere in programs that are worthwhile.

The standard approach to budgetary retrenchment is to spread the pain
among most categories of effort. In particular, this means roughly
equal reductions in the size of each laboratory, rather than
consolidation. The early returns on the 1995 budget indicate that a
“share the pain” approach is generally being followed by
Congress. In the House appropriations bills passed in the summer of
1995, nondefense R&D was cut 5% ($1.7 billion). Most of this was
transferred to defense R&D, which grew by 4.2% ($1.6 billion). This
represents a real cut in total R&D effort equal to roughly the rate of
inflation (about 3%) and a general shift of priorities in favor of
defense (about 1% real growth) and against civilian (about 7% real
decline).

In the nondefense category, every major category of R&D took a cut
except NIH. Real federal expenditures on basic research, even including
the NIH increase, will fall by about 1.5%.

If, as we conclude, the next few years are likely to witness a steady
decline in real federal R&D expenditures in all categories, including
the national laboratories, two major issues arise. The first is
prioritization of the cuts among areas of R&D, and the second is how to
spread cuts in an area of research among institutions.

With respect to priorities, the logic of our argument is that technical
and political complementarities work against substantial differences in
cuts from the historical shares of each major area of research. Only
changes in political representation, such as took place in the
elections of 1994 (and 1974 and 1932 before), are likely to cause a
substantial shift in priorities, and these will be based less on the
economic and technical characteristics of programs than on their
distributive effects and ideological content.

With respect to allocations among institutions, the political process
is much more likely to embrace a relatively technical solution. Three
issues arise in deciding how to spread cuts among national laboratories
within a given category of research, one political and two technical.
The political issue is classically distributive: no member of Congress,
regardless of party of ideology, is likely to volunteer the local
national laboratory as a candidate for closure. And, given the number
of national laboratories, a majority of Congress is likely to face
strong constituency pressure to save a laboratory, just as they did
when facing base closures. Congress has considerable experience in
facing a circumstance in which each member has a strong incentive to
try to protect a significant local constituency, but collectively the
members have an incentive to do some harm. The mechanism is to commit
in advance to the policy change, before the targets are identified and
without the opportunity for amendment. This action relieves a member of
Congress from direct responsibility for the harmful action.

Two recent examples of the use of this mechanism are the “fast
track” process for approving trade agreements, and the base closure
commission. Under fast track, the Congress commits to vote a trade
agreement up or down without amendment on the floor of Congress. This
process prevents any single member from trying to assist a local
industry by proposing an amendment to increase its protections.
Historically, when Congress wrote trade legislation, logrolls among
representatives led to the adoption of many such amendments. Under the
base closure process, the commission, after listening to
recommendations from the Department of Defense, submits a list of
targets to the President. The President can propose changes, and then
the amended list is sent to Congress—again, without the opportunity to
amend the list on the floor. Like the trade procedure, this process
prevents a member from trying to remove a local base from the list.

A similar process for the national laboratories would deal with the two
relevant technical issues. The first is the value of competition among
laboratories in a given area of research, and the second is the
importance of scale economies.

R&D competition has two potential benefits. The first is that it
provides the supporter of research with performance benchmarks that
improves its ability to manage the research organizations, as well as
spurs each competitor to be more efficient and so reduces the need for
intensive monitoring of performance. The second is that it facilitates
parallel R&D projects that take radically different approaches to
solving the same problem.

The primary disadvantages of competition are that it can sacrifice
economies of scale and scope. If a large physical facility is needed
for experiment and testing, duplication can be excessively costly. In
addition, if projects have strong complementarities, separating them
into competing organizations can increase the difficulty of
facilitating spillovers among projects, and cause duplication of effort
as each entity separately discovers the same new information. In
addition, competition has a political liability: parallel R&D means
that some projects must be failures in that they lose the competition.
Scandal-seeking political leaders can use these failures as an
opportunity to look for scapegoats, falsely equating a bad outcome with
a bad decision.

The decision about how to downsize the national laboratory system
requires an assessment for each area of work whether competition is, on
balance, beneficial or harmful. This issue is fundamentally factual,
not theoretical, and constitutes the most difficult question to be
answered before a reasonable proposal for downsizing the laboratories
can be developed.

Footnotes

Abbreviations: R&D, research and development; NIH, National
Institutes of Health; DOE, Department of Energy; CRADAs, cooperative
research and development agreements.

↵ Statistical information about R&D spending in the United
States reported here comes from refs. 1 and 2, and the National Science
Foundation web site: http://www.nsf.gov.

↵ This point was made in the report prepared for the
White House Science Council by the Federal Laboratory Review Panel (the
“Packard Report”) in 1983. For a discussion of this report
(considered the “grand-daddy” of federal laboratory reviews), see
ref. 19.

↵ The National Cooperative Research and Development
Act of 1984 and The National Cooperative Research and Production Act of
1993.

↵ Stevenson–Wydler Technology Innovation Act of
1980; Bayh–Dole University and Small Business Patent Act of 1980;
Federal Technology Transfer Act of 1986; National Competitiveness
Technology Transfer Act of 1989.

↵ This summary of the patenting situation gives only a
general overview of an extremely complicated situation. Additional
rules and regulations apply to establishing and protecting proprietary
information in cooperative research.

↵ The AZT congressional response is not
unique; a similar firestorm arose over the profitable marketing of a
second CRADA-created product, Taxol (see ref. 20).

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